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By Marc Jones

LONDON (Reuters) – Investors face an old ‘dictatorial dilemma’ in Belarus: keeping actions that gain prestige quo advantages in a brutal regime, or promoting them and breaking ties, but the way forward may depend heavily on Vladimir. Putin’s Russia.

Belarusian President Alexander Lukashenko, nicknamed “Europe’s last dictator” and since 1994, won the presidential election last weekend with about 80% of the vote.

The announcement sparked days of protests and led to threats of strict Western sanctions.

While the end of Lukashenko’s reign may be only a long-term advantage for the country, it would also lead to the threat of a rapid debt crisis that would harm primary investors.

Despite a violent crackdown on thousands of protesters, foreign fund managers have shown little willingness to sell their Belarusian bonds. And as recently as June, they flocked to buy the country’s new dollar emissions, which yielded juicy yields of 5.7% to 6.4%.

On Thursday, however, tension in Lukashenko gave the impression that it was intensifying, and BlueBay’s veteran emerging market strata Tim Ash wrote that the scenario resembled Ukraine’s in 2014 when it was in its ‘color revolution’.

While staff at Belarusian state factories are joining the protests and The Russian Foreign Ministry claims that it believes foreign forces are destabilizing Belarus, Ash said Lukashenko’s days may be numbered.

“The now is what Lukashenko is doing: is he doubling the use of force or heading for helicopter departures?”

The Belarusian government released the demonstrators detained on Friday after making a rare public apology in an effort to quell the protests, while European Union foreign ministers meet later on Friday to discuss new sanctions imaginable.

While no respectable investor would tolerate brutal police repression, electoral manipulation or political intimidation, corporations such as Ashmore, JP Morgan Asset Management, Fidelity, Goldman Sachs Asset Management and Franklin Templeton own Belarusian bonds according to Refinitiv data. None commented on their positions.

Some investors said the turmoil had exacerbated Belarus’s problems. The IMF is already forecasting an economic downing of 6% this year, and with more than 90% of its foreign dollar debt, a currency collapse can open the door to default, especially with $2.5 billion in bonds that expire until the end of the year.

Another major threat is that Lukashenko would possibly throw in the towel and that Russian President Vladimir Putin would possibly withdraw his matrix and currency, which remain in his position despite the deterioration of ties between the two leaders.

Russia buys about 40% of Belarus’s exports, provides billions in bilateral loans, and has provided really significant subsidies through preferential oil prices, estimated through the Centre for European Reform at $100 billion between 2005 and 2015.

Chart: Belarus bonds and currency are in https://fingfx.thomsonreuters.com/gfx/mkt/jznvnkwkypl/Pasted%20image%201597395432684.png

VITAL STOP

Union Investments portfolio manager Sergey Dergachev said Russia’s reaction was imperative to “have an effect on bond costs and confidence, as it is vital to (Belarus’s) long-term economic and political trajectory.”

It has Belarusian bonds and, while reducing its exposure and observing what Lukashenko, opposition leader Sviatlana Tsikhanouskaya and the EU, does, assesses “the threat of sanctions that may be simply destructive to investors, namely the (buy) ban on new emissions. Belarus’s debt is very, very low.”

In any case, the resolution can take weeks or even months, as it requires the 27 EU members to agree.

Chart: Belarusian foreign exchange reserves are expected to fall https://fingfx.thomsonreuters.com/gfx/mkt/jbyprkagjve/Pasted%20image%201597131076882.png

So, it’s all a debt crisis? Well, that depends.

The firm ratings Fitch sees the government’s budget deficit rising to 4.3% of GDP and the debt-to-GDP ratio increases to 50% from 42% last year; could increase if the capitul ruble.

Even at existing prices, $2.5 billion in long-term bonds can leave the government just over $7 billion in foreign exchange reserves until the end of the year, enough to keep its funding cravings for about two months at worst.

Nick Eisinger, head of emerging markets from constant revenue streams at Vanguard, said the country faces an external deficit of $2 billion to $3 billion, making it a priority to secure a delayed tranche of IMF aid.

“I wonder, without Russian monetary support, where will Belarus trade?” said Ash from BlueBay.

Graphic: The Belarusian ruble fell despite the intervention https://fingfx.thomsonreuters.com/gfx/mkt/xklvydranpg/Pasted%20image%201597131554205.png

(Additional report through Tom Arnold and Simon Jessop in London and Alex Marrow in Moscow, additional editor of Sujata Rao; edited through Hugh Lawson)